Pullin’ Me Back

*Last week I talked about Behind the Cameras: The Unauthorized Story of Different Strokes. I must admit, I found this unauthorized biography very entertaining; it kept “Pullin’ Me Back (Chingy, featuring Tyrese, 2006)” to the good old 80s. But I was left with several questions: Who was watching Dana Plato’s kid while she was robbing the video store? Todd Bridges was such a heartthrob — Why did he become a crack head, and how did he meet his wife? Did Gary Coleman have more than just a platonic relationship with his friend-turned-manager? So many unanswered questions.

What the unauthorized biography indicated was that, in Gary Coleman’s case, his parents used loan-out companies in which they paid themselves large salaries that likely attributed to his financial down-fall, and eventually led to him successfully winning a $1.28 million lawsuit against them.

Loan-out companies, if set-up and run correctly, can help you protect your assets from creditors and save on your taxes. Keep in mind, owning the rights to your name and likeness is a big deal; it should be protected at all costs. Just ask Muhammad Ali, who sold 80 percent of the rights to his name and likeness, and got a cool $50 million earlier this year. Here’s the “For The Love of Money 411” on the loan-out companies.

“Firm Biz,” (The Firm, featuring Dawn Robinson, 1997)

No not “The Firm” (John Grisham’s famous book, or if you prefer, the famous rap group made up of four New York rappers — Nas, Foxy Brown, AZ, and Nature). I’m referring to incorporating your child’s acting business. Known as a loan-out company, its business is to manage the services offered by a celebrity and hence “loan-out” the entertainer for various projects. You, as a parent, would form this company for your child, and the company would “own” the artist’s image. This is a common practice among actors, musicians and other entertainers.

“Get It Together,” (India Arie, 2003)

The primary advantages of a loan-out company include liability protection and tax benefits. From a liability standpoint, the entertainer should not be personally liable for law suits arising out of agreements signed by the loan-out company. For example, an all boy band forms a loan-out company that enters into agreements related to the bands tour to promote its new album. At one of the concerts, a fan gets hurt and sues the venue, the promoters, and each band member individually. By using the loan-out company, the injured fan should only be able to recover damages from the loan-out company, and not the band members’ personal assets (i.e., their houses, cars, etc.).

There are also tax benefits associated with using a loan-out company. Most entertainers will be treated as employees of the production company, producer, etc. This means that they will receive a Form W-2, and every paycheck (even residuals) will be subject to tax withholdings; such that taxes will be taken out every time. There is perhaps nothing more disappointing to an entertainer than booking a gig paying $20,000 for a two-week shoot and then realizing that they only get to keep $12,000 after all the taxes are paid.

With a loan-out company, no taxes would be taken off of this payment. Thus, the company would get to keep the $20,000 and it would be responsible for paying the taxes (i.e., by making quarterly tax payments). In most cases, thanks to related business deductions, the actual amount of taxes paid on this money is significantly less than the $8,000 when the actor is paid as an employee.

“Contract On Love,” (Stevie Wonder, 1962)

For a loan-out to work, the entertainer must use the company when contracting for work. Thus, any agreements and engagements for services will be between the loan-out company and the studio, production company, record label, etc. To ensure that the entertainer will fulfill his/her commitment to the project, many producers will require that the entertainer also personally sign an inducement letter. This letter will require the entertainer to be bound by the terms of the agreement the production company has with the loan-out company. This protects the producer in case anything happens to the loan-out company (i.e., bankruptcy or dissolution).

“Money Maker,” (Ludacris, featuring Pharrell, 2006)

How do loan-outs work with Coogan’s Law (i.e., the law requiring that a portion, 15% in most states, of the child actor’s earnings must be put away in a trust)? Simple. The 15% is still taken off the top and paid to the Coogan Trust Account. The remaining amount goes to the loan-out company; which then has to also pay the agent, manager, business manager, etc. The net, which can easily be about 45%, usually goes to cover the costs of the company; including salaries to the parent and the child actor.

Shannon King Nash is the author of the award-winning book entitled, “For the Love of Money: The 411 to Taking Control of Your Taxes and Building Your Net Worth.” She uses song lyrics and entertaining stories ripped from the headlines to teach readers how to manage their finances and taxes. Shannon is a CPA, Tax Attorney, and regular expert commentator on KJLH FM Radio in Los Angeles, and has appeared on national television. Contact the Nash Management Group at 818-986-2665 or visit www.nashgroup-usa.com.